In an apparent continuation of the initiative of the Environmental Protection Agency (EPA) and the Obama administration to regulate greenhouse gas emissions, EPA “has proposed a rule that requires mandatory reporting of greenhouse gas (GHG) emissions from large sources in the United States.” This proposal responds to a statutory requirement that EPA establish a mandatory GHG emission reporting system, and the proposed rule would require “suppliers of fossil fuels or industrial greenhouse gases, manufacturers of vehicles and engines, and facilities that emit 25,000 metric tons or more per year of GHG emissions [to] submit annual reports to EPA.” The upcoming publication of the proposed rule in the Federal Register will trigger a 60-day public comment period, and players in the more than 40 types of industry specifically addressed in EPA’s proposed rule should consider submitting comments. Alston & Bird is currently analyzing the more than 1,400 page proposed rule and preamble, but, at present, there are several key takeaways for industry.
First, it is important to understand the context in which this rule has been released. Although the timing of the release arguably does no more than satisfy a statutory deadline, EPA’s proposed rule lends further credibility to the position that, in the absence of federal GHG management legislation, the EPA under an Obama administration is willing to move forward on regulating GHG emissions under existing authority, including the Clean Air Act. Additionally, a GHG reporting rule, such as EPA’s proposed rule, is widely held to be a necessary precondition to the passage of full-blown GHG emission cap-and-trade legislation. Thus, EPA’s proposal also makes it more likely that Democratic congressional leaders will accomplish their stated goal of passing cap-and-trade legislation this year. Consequently, EPA’s proposed rule may portend substantial near-term changes for industry even if the direct impact of the proposed rule itself will not be significant, and industry should consider addressing these broad movements in their comments, as well.
Regarding the direct impacts of the proposed rule, EPA’s approach is disjointed and potentially affects each targeted industry sector differently. For example, most industries would be required to report GHG emissions at the facility-level, but some industries, like fuel importers and vehicle manufacturers, would report at a higher, and perhaps corporate, level. Likewise, for many industries, the obligation to report is triggered at a 25,000 ton CO2e threshold, but, for 19 industries, including petroleum refining and cement production, entities will be obligated to report regardless of whether they meet the 25,000 ton CO2e threshold. An additional threshold would apply to facilities with stationary combustion units, such as boilers, combustion turbines, engines, incinerators, and process heaters; these facilities would not have to report unless the aggregate maximum rated heat input capacity of the stationary combustion units equals or exceeds 30 million Btu/hr.
Furthermore, the issue of how substantial the costs of compliance could be is subject to debate, but the costs could be significant for any given facility or entity. EPA estimates that, on average, it would cost industry approximately $.04 per ton of GHG emissions to comply with the proposed rule. But EPA also estimates that industry will incur $160 million in costs for the first year and $127 million in subsequent years. Additionally, EPA believes that approximately 13,205 facilities and entities would have reporting obligations under the proposed rule. Thus, the average compliance cost for regulated facilities and entities may be approximately $12,116 for the first year and $9,617 per year thereafter. Furthermore, some industries and facilities would be required to directly measure GHG emissions through the use of, for example, monitoring technologies; whereas, other facilities may be able to use alternative methods for calculating or estimating emissions. Consequently, the compliance costs for any given source may be dramatically different than these averages. Thus, it is advisable for every entity with potential reporting obligations to carefully evaluate this proposed rule in light of the entity’s unique compliance obligations.
In the midst of this uncertainty, though, industry should take note of the few provisions that would affect how the mandatory reporting program would work for all industrial sectors. Regulated facilities and entities would be required to report their GHG emissions annually, and the first report would be due in 2011 and would address GHG emissions from 2010. And, unlike some other government or private-party sponsored GHG emission reporting initiatives, the regulated facilities and entities would not be required to obtain third-party verification of their GHG emissions. Rather, EPA would be responsible for the verification. In addition, EPA’s proposed rule would require reporting for emissions of “carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFC), perfluorocarbons (PFC), sulfur hexafluoride (SF6), and other fluorinated gases including nitrogen trifluoride (NF3) and hydrofluorinated ethers (HFE).”
In sum, the likely impact of this proposed rule is twofold. First, EPA’s proposed rule sets the table for further GHG emission regulation. Second, industry is likely to incur noteworthy compliance costs as a result of the proposed rule. The extent of compliance costs, though, is highly variable and will likely depend on industry sector, as well as the quantity of GHG emissions. Each potentially regulated facility or entity will have the opportunity to provide—and would be well-advised to provide—feedback to the EPA on its proposed rule during the public comment period, either with written comments or at public hearings already scheduled for April 6 and 7.